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Implementing "Chained CPI" Can Reduce the Deficit

on March 20th 2013

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One of the main tenets of Fix the Debt is that all options for addressing the debt should be on the table. Putting together a comprehensive plan that addresses the national debt will require lots of significant policy changes involving all parts of the federal budget. But some more technical adjustments can also play a key role in getting the debt under control. These ideas deserve fair consideration.

One such technical fix involves improving how inflation is measured. A more accurate inflation measure would reduce the deficit on both the spending and tax side and has broad, bipartisan support.

An updated report from the nonpartisan Moment of Truth Project, co-chaired by Fix the Debt co-founders Alan Simpson and Erskine Bowles and charged with carrying on the legacy of the Simpson-Bowles Commission, finds that implementing “chained CPI” could save $390 billion over the next decade and reduce the deficit by more than $1 trillion in the decade after that.

“Chained CPI” may sound like a rapper’s name or something that is attached to your tablet, but it is actually an alternate way of measuring inflation created by the federal Bureau of Labor Statistics. CPI is short for Consumer Price Index, which measures inflation based on price changes over time to a “market basket” of select consumer goods.

Chained, or superlative, CPI is considered a more accurate measure of inflation than is currently used because it better takes into account consumer behavior. As the Moment of Truth report explains:

If one spends $100 per month on apples and the price of apples suddenly doubles, it is unlikely that their cost of living will go up by $100. Rather, an individual will substitute away from apples, buying less of them than they otherwise would and therefore buying more of something else instead.

The CPI is used to calculate cost-of-living adjustments for various government programs and to index portions of the tax code to ensure that these programs and tax provisions keep pace with inflation. So, using a more accurate measure of inflation would better achieve this goal and bring savings from both spending and revenue.

The paper points out that correcting the CPI has support from economists and experts from both parties. It also notes that, contrary to the claims of some, implementing the chained CPI would not be regressive, meaning it would not impact lower- and middle-income households disproportionately compared to higher-income households. Moreover, a comprehensive plan could include other changes to offset the impact on the disadvantaged and the elderly, as proposed by Simpson-Bowles and other plans.

Adopting the more accurate inflation measure has broad support. Not only is it included in bipartisan deficit reduction plans like Simpson-Bowles and Domenici-Rivlin, leaders in both parties also support it. President Obama included this reform in his offer to replace the sequester and supports it being part of a comprehensive deficit reduction package. In addition, House Minority Leader Nancy Pelosi (D-CA) has said she is open to it. On the other side, House Speaker John Boehner (R-OH) included it in his proposal to avoid the fiscal cliff. Furthermore, House Ways and Means Committee chair Dave Camp (R-MI) supports the change as does former Senate Budget Committee chair (and Fix the Debt co-chair) Judd Gregg (R-NH).

Read a summary of the new report here and the full report here. And learn more about chained CPI here.